Burying Cheap Money in the Oil Sands

04/29/2009 9:59 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Suncor's loss is not deterring buyers given the lousy alternatives, writes Internet Wealth Builder editor Gordon Pape.

About the only thing that market watchers can agree on these days is that stocks are going to continue to be extremely volatile for at least the next few months. Beyond that, there is no consensus whatsoever. Has a new bull market begun is this just a bear market rally? One person's guess is as good as another's.

However, the one thing everyone does agree on is that short-term interest rates are going to remain at historically low levels for the foreseeable future, and the Bank of Canada confirmed that last week when it not only cut its key overnight rate to a record low 0.25% but also took the unprecedented step of saying it would remain there for at least the next year.

Anyone who wants to keep their money in "safe" securities must face up to the fact that they are going to get almost no return on their investment for at least the next year. You might as well take the cash and bury it in the back yard. It will earn about as much there!

[Rewards have been richer in the oil patch.] EnCana (NYSE: ECA, Toronto: ECA.TO) reports a big profit and its shares rise. Suncor Energy (NYSE: SU, Toronto: SU.TO) reports a first-quarter loss, but its shares rise, too. What's going on? It appears investors are looking past the C$189 million loss (20 cents a share) and [are] focusing instead on a significant increase in production and the fact the company would have posted a profit had it not been for various accounting losses.

Taking these out of the equation, Suncor would have earned $227 million (24 cents per share) in the quarter compared to $805 million (87 cents per share) in the first quarter of 2008. Cash flow from operations was $479 million, down from about $1.2 billion last year due to much lower oil prices.

"If you back out the effects of accounting impacts from mark-to-market and foreign exchange losses, and the non-structural charges for deferred growth projects, we had a solid quarter, while financial performance was reflective of current economic conditions," said chief executive officer Rick George. "Downstream margins were strong, and we reported record quarterly production in the upstream."

Total production averaged 314,500 barrels of oil equivalent per day (boe/d) during the first quarter, 278,000 barrels of which came from the oil sands. This compares with 286,200 boe/d (248,000 from the oil sands) in the first quarter of last year.

Suncor shares rose 86 cents in Toronto on Thursday after the results were announced and were up another 47 cents on Friday to finish the week at $30.80. The stock has now gained 64% since it hit a three-year low of $18.80 last November. [The stock closed at C$30.11 in Toronto Tuesday—Editor]

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